Duperreault start-up Mereo rated. Aims to unlock potential of reinsurance investment

Mereo Insurance, the Bermuda-based re/insurance start-up that has generated plenty of headlines due to the involvement of the former AIG CEO Brian Duperreault and its strategy to work closely with third-party capital, has now received a preliminary credit assessment from rating agency AM Best for its main underwriting vehicle.

Duperreault is lined up to become Chairman of the new venture, which remains the only significant start-up venture of this hard market, it now seems as the rumoured other start-ups don’t seem as far along at this stage.

Mereo Insurance has always been expected to follow a balance-sheet agnostic approach, in leveraging third-party capital alongside its own resources, to help it scale faster and generate what can be very attractive fee income for a business Duperreault has previously been quoted as saying would be “underwriting” first.

Now, AM Best has assigned a Preliminary Credit Assessment (PCA) to Mereo Insurance Limited (Mereo) with a Financial Strength Assessment of A- pca (Excellent) and a Long-Term Issuer Credit Assessment of “a-” pca (Excellent), with both outlooks stable.

AM Best said it “reflects Mereo’s balance sheet strength”, which AM Best notes to be very strong.

AM Best also cites Mereo’s “adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).”

Of course, this is all off the business plan, as Mereo Insurance has not (as we understand it) begun underwriting at this stage.

On the business plan, AM Best said that it expects Mereo to “maintain a balance sheet assessment of very strong supported by projected risk-adjusted capitalization at the strongest level throughout the five-year initial forecast period, as measured by Best’s Capital Adequacy Ratio (BCAR).”

Initial capitalisation of the company is expected this year, and AM Best said that “retained earnings through the forecast period are expected to support premium growth, which is expected to be rapid in its early years, based on projections.”

The rating agency also highlights that Mereo’s capital is expected to be managed through “the use of reinsurance and potentially third-party capital.”

AM Best also notes that Mereo’s business plan “includes rapid premium growth in its first years and improving operating profitability that supports an adequate operating performance assessment. Outlined in the plan is a portfolio composed of casualty and specialty business diversified by subcategories, geographies, and attachment points.”

The rating agency notes the senior team’s experience and track records, but also highlights that as with every startup in reinsurance, there is execution risk.

Among the senior team are Lawrence Minicone, a co-founder, Managing Partner and Chief Investment Officer and an executive with significant capital markets experience, as well as Jason Miller, who is a co-founder and Managing Partner of Mereo Advisors, a related entity that looks set to offer third-party capital partners opportunities to invest directly in insurance and reinsurance risk.

While Mereo Insurance is expected to have a casualty and specialty lines focus for its own portfolio, it is the new startups ambition to leverage third-party capital where things get more interesting for our readers.

Mereo Advisors has been established as an investment manager with a Bermuda base, focused on delivering solutions in the insurance and reinsurance space.

Mereo Insurance and Mereo Advisors have a stated aim to unlock the potential of insurance and reinsurance investment.

The mission statement is intriguing, “Our team of seasoned professionals, with expertise in portfolio management, risk analysis, and insurance, is committed to delivering exceptional risk-adjusted returns using both data-driven and tactical capital allocation strategies.

“Through our proprietary approach, we strive to deliver fundamentally uncorrelated and elevated returns through the cycle. Our mission is to democratize direct investment into insurance related risks.

“We aim to create unparalleled access to specialized return streams that were once reserved for industry insiders.”

The data-driven and specialised investment approach is being designed to “unlock the untapped potential of insurance and reinsurance.”

The use of the word “democratize” is particularly interesting when you consider the background of one of the co-founders.

Miller has a history in the index investing world, given his career included over a decade with BlackRock’s exchange-traded funds business, iShares,

To truly unlock the potential of insurance and reinsurance linked investments, through direct investments into the risk with a goal to democratize access to reinsurance-linked returns, new fund solutions are perhaps one way this can be achieved.

They will require a fast-scaling approach to the underwriting side, to deliver sufficient breadth of risk, reach and of course diversification within portfolios, to make any more readily accessible direct insurance-linked investment work.

For an ETF of insurance and reinsurance risk to work, it’s going to have to have a significant reach, which is why we’ve always favoured such a venture as being most likely to come out of one of the largest reinsurers in the world, rather than a new startup.

But, an idea like this does seem to align with the business plan AM Best has explained.

Minicone, meanwhile, has experience gained from hedge fund Bridgewater, which he left and later set up a new investment manager which reportedly raised the ire of Ray Dalio himself. Minicone has been cited as an extremely sophisticated and data driven investment specialist, with a track-record that has attracted significant capital in the past.

It’s also been widely reported that Mereo Insurance has hired former Aegis London CEO David Croom-Johnson as its first Chief Executive.

Duperreault has gone on the record to say that Mereo will borrow from the hedge fund model, to achieve a broadly diversified and portfolio driven approach to its underwriting business, while also saying that more capital is needed in the industry to broaden insurance markets in general.

It’s going to be interesting to watch how the firm’s strategy evolves, once it is properly up and running, as it seems the pieces are being put together for what could be an interesting attempt to expand the horizons of insurance and reinsurance linked investments, on the back of an aggressively fast-growing, underwriting first, re/insurer.

Or, as has also been mooted, it could just be another twist on the hybrid approach, somewhere between hedge fund or total-return, and third-party capital focused.

Either way, the investment opportunity Mereo intends to create, given the discussion of helping investors directly access insurance risk and the ambition to democratize access to the insurance-linked asset class, as well as it’s unique management team that is now forming, mean that, wherever on the hybrid spectrum this new company lands, it’s sure to be interesting.